TOWNIE WITH A TEXAS ACCENT: Canton cannot afford its future

Canton’s future is in jeopardy. The town has committed to payments it cannot make to meet obligations it cannot afford. And it could cost the town millions.

Charles Owens

(The following is part 1 of a three-part series.)

Canton’s future is in jeopardy. The town has committed to payments it cannot make to meet obligations it cannot afford. Specifically, Canton is threatened by enormous retirement obligations to town workers. These workers include about 650 active employees and 550 retirees.

According to consultants hired by the Town and the Norfolk County Retirement System (http://www.norfolkcountyretirement.org), these workers are clerical, administrative and technical workers, police officers, firefighters, teachers, ambulance attendants and other current and retired employees of the Town. (See the consultants’ report Town of Canton Other Post Employment Benefits at http://town.canton.ma.us/Finance/OPEB-2011.pdf.)

The threat to the town is a toxic mix of budget stresses that has been brewing for years, including soaring pension and retiree health care costs. An especial threat to the town’s future is a current deficit of approximately $150 million for retiree pension and health care benefits earned in past years by current and future retirees of the town. These retirement benefits are promised by the town and are payable in cash for as long as retirees live.

However, the town has not set aside money to meet these future payment obligations, which continue to increase as more town employees qualify for retirement payments for life. The accumulating deficit for these earned but unfunded retirement promises is expected to reach more than $200 million within the next 10 years. Such deficits are driving other towns into bankruptcy. Like Canton, these bankrupt towns did not set aside funds to meet future payment obligations to retirees.

In the Warrant prepared for the 2012 Annual Town Meeting in April, the town reported that the deficit for promised retiree health care benefits alone was $131 million as of January 2011. This deficit has grown to an estimated $140 million today, based on projections prepared by the town’s consultants. Almost half of the deficit is debt owed currently active Canton employees, and the remainder is debt owed to Canton retirees, their spouses, and their survivors. (See the consultant’s report.)

As Town Finance Committee members wrote in the 2012 Warrant (at page 97), “The basic problem is that while the Town has made promises to pay the medical cost for retired employees, it has not put the funds aside to pay for those benefits.” The committee characterized the deficit as “a major and growing unfunded liability of the Town.” Scrambling for funds to reduce the now estimated $140 million liability for retiree medical cost, the Finance Committee could only identify potential sources of less than $1 million to begin setting aside money to meet this mounting debt.

So, unless something changes, Canton taxpayers will have to pay down these massive pension and retiree health care liabilities year after year for decades to come. This will not only threaten taxpayers’ bank accounts and the town’s bond rating, it also will threaten town services. The town has exhausted creative accounting maneuvers, one-time spending cuts, and palliative revenue-raisers to bail itself out of these debts. How much Canton taxpayers will have to pay depends on how the town manages these mushrooming retirement liabilities going forward.

Property tax increases necessary to pay down the current retiree health care liability alone could be overwhelming. Ironically, voters would have to approve large tax increases to pay for benefits of a quality that almost none of them receive from private employers, according to the respected Massachusetts Taxpayers Foundation. Millions more in tax revenues would be needed to pay down the town’s growing pension liability.

Currently, the estimated cost to taxpayers to set aside funds annually to pay down the accumulating health care liability and also fund current-year promises to pay future retiree health care benefits is an extra $13 million a year in round numbers. This does not include millions more annually in costs to taxpayers to set aside funds to pay down the town’s pension liability and to fund current-year promises of future pension payments to retirees. These costs must be paid from annual town budgets, which are funded almost entirely by property taxes.

Without draconian property tax increases – or vast reforms to retiree benefits – the only way to fund the promised benefits would be by dramatic cuts in local services. Without reforms, the town would be forced to siphon millions of dollars annually from education and public safety, and otherwise eviscerate local services, simply to fund the annual costs of retiree health care and pension payments. As the Finance Committee said, “When the costs for these benefits become too large to pay with the current year’s appropriations, the Town will either need to cut services or change its promises” to the Town’s retirees (Warrant at page 97).

NEXT WEEK: What about the town’s plan?

Charles Owens is chairman of Owens & Company, a 40-years old merchant bank. He is a former White House advisor, patent holder, Ford Foundation consultant, and a primary architect of the US Dept. of Energy. He is a Canton resident, native Texan, and father of five. Write to him at texastownie@gmail.com.